The Federal Circuit Clarifies Standard for Removal Where a Last-Minute Patent Issue Arises in a State Court Trade Secrets Case

May 4, 2020

In a case decided earlier last month, the Federal Circuit addressed the always difficult issue of when patent issues raised as part of the proof of claims that otherwise sound in state law are sufficiently preponderant to justify removal.  Intellisoft, Ltd. et al. v. Acer America Corporation, et al., 2020 WL 1647241 (Fed. Cir. April 3, 2020).

Intellisoft started as a trade secret action in California state court.  The Intellisoft plaintiffs, i.e., Intellisoft, Ltd. and its president (collectively “Intellisoft”), sued Acer for allegedly misusing trade secrets that Intellisoft had shared with Acer in the early 1990s.  Intellisoft alleged that it discovered in the early 2010s that Acer had applied for a patent that incorporated the trade secrets Intellisoft had shared with Acer.  Intellisoft sued Acer in 2014 alleging that Acer had misappropriated its trade secrets by incorporating them into patent applications that ultimately resulted in four related patents.

The litigation progressed and in September 2017 Intellisoft produced three expert reports.  In one of the reports, Intellisoft’s expert opined that Intellisoft’s president should have been named as an inventor of the subject patents.   However, during his deposition he stated “this is not an inventorship dispute case.  It just happens to be the facts in this case.”  Trial of the matter was scheduled for November 2017.

On October 30, 2017, without obtaining the required leave from the state court, Acer sought to file a cross-complaint for declaratory judgment on inventorship.  The state court did not accept the filing but recorded the filing as “lodged.”  On the same day, Acer removed the action to the Northern District of California.  Acer cited 28 U.S.C. § 1441, which provides for removal of an action in which the district court would have original jurisdiction, and 28 U.S.C. § 1454, which provides for removal of an action where a party asserts a patent counterclaim.  The district court denied a petition by Intellisoft to remand the action and granted summary judgment for Acer on Intellisoft’s state law claims stating that the inventorship issue was “not just an alternative theory…,” but was the “only theory of the case.”

The Federal Circuit vacated the district court’s judgment and remanded the matter to the district court with further instructions to remand the action to state court.  The court reaffirmed the Gunn test for determining the propriety of removal:

When a plaintiff brings only a state law claim, the district court will have original jurisdiction over the state law claim if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.

The Federal Circuit disposed of the Section 1441 removal on the ground that Intellisoft’s complaint did not necessarily raise a federal issue.  Intellisoft, the Federal Circuit concluded, did not need to prove inventorship under federal patent law to prove ownership of any included trade secrets.  Nor did Intellisoft need to prove patent infringement to prove trade secret misappropriation.  While the patents may have been relevant as an evidentiary matter to the state court claim, Intellisoft’s use of the patents as evidence of the alleged misuse of its trade secrets did not necessarily depend on the resolution of a substantial question of federal patent law.

The Federal Circuit disposed of the Section 1454 removal ground on the basis that Acer had not actually asserted its inventorship in an operative pleading.  At the time it filed its cross-complaint, to do so required Acer to seek leave of court.  As Acer neither sought nor received such leave from the state court before removing the action, there was no operative pleading containing a federal patent cause of action and Section 1454 did not support removal.

Authors: Rory Radding; Sherman Kahn